Setting off further suggestions that the Bank of England might have a long awaited interest rate rise in 2016, a recent report states that mortgage debt has risen for the average household to £85,000.
According to the Bank of England report, a real rise in wages, and lower inflation, means that households are better placed to deal with a rate rise. Threadneedle Street concluded that the economy seeing a 2% rise in average wages in 2015, along with low inflation, had increased disposable household incomes enough for the average mortgage-payer to cope with a 2% rise in base interest rates in 2016.
Evidence suggests that the average household has mortgages of £85,000. This is rise from £83,000 on average in 2014, due to rising house prices, and a significant demand from first time buyers. Other unsecured household debt, such as car loans and credit cards, remained around the same from 2014, at an average per household of £8,000. Many economists and experts seem to agree that those levels of household debt are likely to rise over 2016, to an estimated £10,000, in many cases due to the complacency of borrowers.
At the same time, figures show that annual wage rises reached an average of 2.7% in April 2015, but fell back in the last few months of the year. Minouche Shafik, a Deputy Governor at the Bank, said that the rate of growth in earnings had levelled off recently, and that additional factors also helped to keep inflation low, citing amidst other factors a strong pound and a fall in commodity prices. She has also recently stated her intention not to vote for an interest rate rise until she is convinced that earnings growth us once again above 2%.
That aside, overall these factors all give rise to a good set of circumstances to justify interest rates rises, as long predicted for 2016. The data gives reassurance to policymakers that any rate rise will only have a limited impact on the ability of most households to meet mortgage and debt repayments. However, the data also suggests that first time buyers (with high loan to income mortgages) and low income households would probably struggle if rates were raised. The knock on effect on house prices and the housing market would also impact upon renters, an increasingly large percentage of the housing market. Many are beginning to struggle with rent payments – and if prices increase that social problems could just get worse.
It is a tough decision for Threadneedle Street. This is especially as the study also found that households would limit their spending by much more than savers would increase their own spending. This would lead to a contraction that would actually harm GDP growth. This trade-off between an interest rate rise, financial austerity, and disposable income levels has caused much discussion in Threadneedle Street, and has greatly contributed to delays in raising interest rates.
2016 is seen by many as a crucial year economically. Although January has started the year with serious economic issues globally – building on an overall positive 2015 can see finally a breakthrough, growth and stability.
With that in mind, which way will the Bank of England go? With household debt at those levels, a rate rise is realistic – but at what cost and what economic impact elsewhere? Threadneedle Street need not rush, though, in making such decisions; it is still only January. However that uncertainty is bad for economists and household alike.